Nokia Company: Organisation and Profitability

Nokia Company: Organisation and Profitability It all began for Nokia when Fredrik Idestam built a paper mill back in 1865. He built another factory near Nokianvirta River, Finland, the place whose first five words gave the company its name Nokia. Between the years of 1865 and 1967 Nokia was recognized as a vital industrial machine; though further expansion needed a merger with a cable company and another merger with a rubber firm to set up the Nokia Corporation. This was the beginning of the move to electronics production by the company. The mobile phone era for Nokia began in 1981 when the first ever international mobile phone network was built called the Nordic Mobile Telephone (NMT). Organizational Structure at Nokia As of October 1, 2009 the organizational structure at Nokia was extremely mobile and flexible. Nokias organizational structure is horizontal and it allows for greater flexibility and speedy communication channels between different departments. The devices unit looks after the development and management of mobile devices portfolio which is targeted at all major consumer segments. The solutions department ensures that it continuously develops solutions whereby ensuring that a particular mobile device has integrated contents and personalized services and the output of these three components results into a leading mobile phone for the end user. The solutions unit works with other departments in close proximity to provide such solutions. The services department creates and designs internet services that enhance the consumer experience when Nokia phone users interact with the web. The main areas where this unit focuses on include messaging, maps, music, and Ovi developer tools. This department also ensures that there is a consistent increase in different services as the market evolves. The other significant department is Markets which acts like a supply chain department for Nokia. The unit is also responsible for sales channels, branding and marketing activities for various products and services. The corporate development department looks for future growth opportunities and it also plans for future strategic actions that will give the company a competitive advantage against competitors. This department also provides operational supports to other core departments such as Devices, Services, Solutions and markets. Nokia Siemens Networks is a joint venture with Siemens and it provides network infrastructure which is both fixed and wireless. This division also provides communications and networks service platforms. Finally, the last major division is NAVTEQ; this unit is a provider of detailed navigational maps and digital map data automobile navigation systems, navigation systems for mobile devices, internet mapping applications and mapping solutions to government and other businesses. NAVTEQ is an important part of Nokias operations since it provides downloadable maps and other content that will enhance the experience of consumers who use Nokias smart phones. Corporate Governance The way authority and responsibility is organized at Nokia it shows that the company is exemplary in its approach towards corporate governance. The companys strategic and significant natured decisions are made by the board. These matters might include strategic guidelines, approval of periodic plans and decisions on major divestments or investments. The company charter, article of association and Finnish Companies Act determine the roles and responsibilities of all directors and executive members. According to the auditors and company information strict guidelines are followed in terms of code of conduct and ethical behavior of each employee. Similarly the company complies with all stock market requirements of the Helsinki stock market, New York and Frankfurt stock exchanges. The company provides all necessary data to authorities at NYSE because the under the rules any firm that complies with its national laws must file any differences that exist between its national laws and the laws to be followed under NYSE. Competitors of Nokia Corporation Nokias direct and major competitors include Motorola Inc, Cisco Systems Inc, Research in Motion, LM Ericsson Telephone Co., and QUALCOMM Inc. The company faces stiff competition in the business oriented mobile phone market from RIMs Blackberry series. Nokias E-series phones are geared to compete with the Blackberry series. Similarly the company faces challenges from Samsung and Motorola in the touch screen phone markets and the latest Android based phones that offer efficient and extremely user friendly interface to consumers. In the navigations and maps market Nokia, like the traditional manufacturers such as Garmin, TomTom, faces tough competition from the Google and Apple partnership that will make the iPhone the ultimate navigation and smart device for this generation. The difference between this navigation process that iPhone will offer is that consumers wouldnt need to download maps for a price or they would not need automotive navigations systems rather they would use their smart phones as navigation devices at very low rates. For the year 2009, Nokias market share remained flat at around 38% in the global handset market after consumers continue to encourage Apples iPhone in favor of the N series that Nokia is offering. Nokia also faces competition from Ericsson mobile phones in the music phones; Sony Ericssons superior voice quality and speaker quality give its phones an edge over Nokias Express music series. Industry Outlook for 2010 The expectations of the company for 2010 are considerably flat in terms of the performance of its various divisions. Overall the mobile device industry is expected to increase by about 10% in 2010 in terms of volume compared to 2009. For the year 2010 Nokia expects its mobile device market share to be flat compared to 2009, a similar sort of expectation also exists for Nokia and Nokia Siemens Networks as the venture sees a minimal increase in euro terms for the mobile and the fixed infrastructure services market. Importance of International Markets to Nokia Corporation In 2009, out of the total sales from the company Europe accounted for 36%, Chinas share was 16%, Middle East Africa 14%, North America 5%, Asia-Pacific 22% and Latin America 7%. As we can see from these numbers that about 59% of sales are coming from the developing world; for a company that began operations from Finland that is an important statistics since most of its revenues are coming from international markets especially from developing countries. The 10 markets from which Nokia generated the highest amounts of sales revenues are listed below in decreasing order; with the highest written first and lowest stated last: China, India, the UK, Germany, the United States, Russia, Indonesia, Spain, Brazil and Italy; when combined these markets provided 52% of the total sales in 2009. It is important to note here that China and India; the fastest growing economies in Asia are leaders for Nokia sales; secondly the list also contains growing markets such as Brazil and Russia. It is important to note here that because Nokias main sales driver is the mobile device market hence there are higher sales potential for Nokia in developing countries. This is because countries such as India and China are experiencing large demand for mobile phones due to the rapid growth and development of infrastructure especially network infrastructure. The rising levels of GDP per capita and income levels of people in the developing world are increasing their ability to purchase mobile phones therefore we could see that in the near future major growth would come from developing economies. Foreign Exchange exposures Faced by Nokia Nokia has businesses all over the world; this global presence means that assets and sales, liabilities and loans taken or completed in different parts of the world may be higher or lower in value when translated into the Euro or any home base currency. Because Nokia owns substantial assets in foreign markets therefore the company has to hedge and protect itself against the potential of currency adjustments in the negative direction. Nokias foreign exchange policy is developed by the treasury department of the company which looks after the interests of the company such that foreign exchange exposure is minimized and shareholder value is maximized. Under the policy; transactions which are considered of material value are hedged against foreign exchange exposures as long as the hedging tool is not uneconomical i.e. the hedging cost is lower or market liquidity is favorable. The company uses derivative financial instruments such as foreign exchange options and forward foreign exchange contracts to manage hedging and reduce the exposure. The group has a policy of not hedging 2-year or beyond forecasted foreign currency cash flows. New Product and Market development Nokia operates in a highly drastic and technologically changing industry; on the consumer side the company also sees the acceptance and increasing demand for more sophisticated products therefore the company has to remain on its toes and come up with new products and services. The recent financial crisis which was coupled with economic downturn as well saw most industries and companies experiencing reduced profits or even losses. If we look at the table above we see that for the period 2004-08 the average RD expenditure as a percentage of sales was around 11%. This explains how important the development of new products and markets are to companies like Nokia. RD expenditure dipped slightly during 2009 by about 1% compared with 2008 figures because of the decline in sales. The reduction in total revenues during the year 2009 was because the brunt of the crisis or the lowest point of the crisis was considered to be the third and fourth quarters of 2009. The major problem faced by Nokia mobile devices sales was the fact that as macroeconomic aggregates plummeted world wide; people were laid off, disposal incomes squeezed and purchasing power declined in some regions because of currency depreciation, all these factors led to the decrease in demand for Nokia phones. Despite these tough circumstances Nokia continued to expand product development and introduced new products in the mobile device markets, new systems and networks from Nokia Siemens Partnership and navigation phones under the NAVTEQ division. Capital Structure and Liabilities Management at Nokia The average basic number of shares during 2009 was 3.705 billion, 2008 was 3.743 billion and 2007 was 3.885 billion. The difference between diluted and basic average number of shares was negligible during all the three years stated above. About 1% of the shares were owned by Nokia Corporation during 2009. There was not much change in the capital structure during the three years apart from a buy-back and cancellation of shares that were owned by the company during 2008 and 2009 respectively. If we closely analyze the net debt to equity ratio for the 5 year period we see that initially in the years 04, 05 06 and even 07 the company had surplus assets over total debt. Though this situation drastically declined during 2008 as the credit crunch forced Nokia to borrow money and bridge the gap between its working capital. This factor eroded the asset base advantage the company was holding for the previous 4 years before 2008. Another important factor was that short-term borrowings rose substantially during 2008. Short-term borrowings increased from 714 million Euros in 2007 to 3,578 million Euros in 2008. The equity ratio represents the amount of assets represented or funded by the equity holders. From the table above we can see that the assets funded through equity has been on a declining run throughout the five year period. This also explains that as years have passed by liabilities have been increasing used as a way of financing assets. Many analysts believe that borrowing is a lesser expensive way of raising funds compared to equity as interest paid reduces effective tax rate; secondly creditors do not have a say in the way management runs the business; thirdly no dividends need to be paid out. On the other hand equity has its own advantages such as no finance costs; in case of bankruptcy the claim of common shareholders is last only after other creditors have been paid out. Overall companies are suggested to find an optimum equity and liability combination by working out the WACC at different levels. 2007 was considered one of the best years in Nokias history not only did the stock do well but the companys other major indicators were in green as well. For instance the return on equity was around 53% during 2007; that is a phenomenal return for shareholders from a company that competes in such a tough competitive environment. The return on equity declined significantly during 2008. As we see from the table that the value declined to 27.5% from 53.9% in 2007. This again explains the difficulty the company faced during 2008 in terms of low sales volumes, depressed prices and difficult financial conditions. Nokia Corporations shares are listed on the following stock markets: NASDAQ OMX, (Helsinki), Frankfurter, and New York Stock Exchange. The company delisted its Swedish Depository Receipts (SDRs) from the Stockholm Stock Exchange. The last day of trading of these SDRs was June 1, 2007. Raising capital and loans from foreign capital markets has a number of benefits and a few disadvantages as well. In terms of the benefits; firstly by listing stocks in a market such as NYSE a company like Nokia gave itself exposure to one of the most valuable and important stock markets in the world. New York is the financial capital of the worlds largest economy and having the ability to raise funds in such a market builds great reputation for a company apart from substantial capital. Similarly the SDR move into the Swedish Stock Market was a strong move as that would have strengthened the capital structure before the delisting. SDRs provide a substantial capital inflow in lieu of a stable and known cost of capital that gives the firms financial cost structure sustainability and consistency. In terms of the disadvantages economic activities in a foreign country might impact the shareholder value of the whole group. Though this cost is offset by the point that todays financial markets are so dependent on each other that market risks are almost similar in virtually all countries and their stock markets. The important thing here is that companies like Nokia must be aware of the trade cycles and the economic cycles of the world and individual markets and there relationship between each other because that will determine the impact of raising capital in foreign markets. Impact on Market Value as a Result of Strategies in Foreign Exchange Risk, Raising Capital and Moving into New Markets Technological firms generally have higher risk attached to their stock prices and market values therefore we expect them to do extremely well when the economy is booming and the company is able to come up with consistent and high quality products. The case of Nokia is no different the company has successfully established itself as one of the most reliable and advanced manufacturer of mobile devices. Steadily over the years Nokia has moved into new markets which have diversified the portfolio of the company hence spreading the risk over different but related markets. Nokias move to enter new markets has been a good way of diversifying business interests in the sense that the company has not only developed new products but it has also moved into new physical markets. Developing new products has its own advantages but moving into new geographical markets can benefit companies from the all important concept of economies of new scale. Going into new markets exposes the company to absolutely new customers hence increasing the total potential customer base of the company. Raising capital in foreign markets also impacts the market value of the company in a positive way. The company, by raising additional capital in new markets, not only increases its ability to spend money on acquisitions, development, and supply-chain but also gives credibility and higher standing to the companys share in the capital markets and makes the company a strong candidate for a better rating from agencies. The above graph is the stock price movement of Nokia stock, listed on NYSE, versus the SP 500 over a five year period. What is evident here is that consistently the Nokia stock has out performed the SP 500 for most of the time period under discussion. In percentage terms the stock has performed extremely well during the later half of 2007 up to mid 2008; even during the tough times of the late 2009 the stock did better than the overall SP index. The above graph is again representative of the fact that the companys stock performed better than most top company stocks during the boom period of 2007. Credit has to be given to the financial managers of the company since there prudent steps ensured a better than average EPS for the company and subsequently even better share price performance. Evaluation of the Firms Finance Managers In terms of hedging and controlling the foreign exchange risk I think the financial managers did a good job by employing a prudent policy of hedging all those cash inflows and outflows which were due within 2 years period. This is a prudent approach; secondly if we look at the table below we see that the company has remained profitable despite the financial and economic crisis that plagued the global markets for the past 2 and a half years. We also see that the company gave dividends in all the last six years under discussion; this also shows consistency and the right mindset of financial managers who rightly understand the need to rollout dividends in order to ensure continuous investments from investors in the near future. The above graph shows that profitability peaked during the 2007 period and steadily declined thereafter this also shows the difficult financial and economic environment that was weathered by the corporate sectors of different economies. The impact of the crises were so great that profits before taxes almost decreased by 50% in 2008 from 2007 profits before taxes.